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FDI cap on insurance to stay

New Delhi, Dec. 3: The Insurance Regulatory Development Authority (IRDA) has opposed the idea of raising the cap on foreign direct investment in the insurance sector from 26 per cent to 49 per cent.

Speaking on the sidelines of the international banking summit, IRDA chairman N Rangachary said: “Section 6aa of the IRDA Act provides that Indian promoters have to bring down their stake to 26 per cent after 10 years of operation through a process of initial public offering. This will be equal to the stake of a foreign partner.”

He pointed out “if both the foreign and the Indian company subsequently maintain an equity stake of 49 per cent, then only 2 per cent will go for public holding. This is not a viable proposition”.

Rangachary also ruled out the possibility of reducing the entry level capital requirements for health insurance companies. He said: “There are no dedicated companies who have really approached us till now. Let companies approach us, then will we be able to explore whether relaxation is feasible or not”.

He reiterated that the Banking Act had to be amended in order to allow banks to enter the area of insurance brokerage.

The government has come under increasing pressure to open up the insurance sector. Just last week, US treasury secretary Paul O'Neill, who was in Delhi to attend the G-20 meeting, made an impassioned plea to the finance minister and other government officials to open up the sector and buttressed his argument by saying China was permitting foreign investment of 50 per cent in the insurance sector.

Speaking on the occasion, Ajay Shah, advisor, joint secretary, Government of India said: “Securitisation is the big new animal for the last few years. I feel the embrace between the banks and security markets is very healthy”.

Shah said the basic challenge before the RBI is to check whether the basics of operational risk are complied with stated rules or not. Banks also need to be supported with a regulatory framework which has the ability to take prompt corrective action, he said.

Sebi executive director R. M. Joshi said: “We have yet not matured to self-regulate ourselves. This is why we have a lot of scams and have an active problem of misconduct in the security market”. He added that the only mandate set by Sebi as a regulator is to have investor protection regulations. “Our only concern is to ensure strict compliance with various acts.”

Rangachary pointed that despite fragmentation of the financial sector, there is an universal move towards convergence.

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